Can Housing Stocks Make a Comeback?

Home prices are at their lowest valuation in at least a generation.

NEW YORK ( InvestorPlace ) -- Now that 2011 is upon us, what will the best stocks be? Well, over the last few months housing stocks have been doing all they can to erase the bad memories of the 2007-2009 real estate collapse. While the S&P 500 has added 8% from its November low, the Homebuilders SPDR ETF ( XHB) has climbed an impressive 17%.

And despite Friday's stock market selloff, housing stocks moved higher thanks to surprisingly good quarterly results from KB Home ( KBH). The company reported fourth-quarter earnings of 23 cents per share -- 40 cents better than analysts were expecting. Although KBH sold fewer homes, the ones it did sell went for higher average prices. That helped boost profit margins, which increased to 19.7% from 19% last year.

Can the performance continue? To answer that, we need to look at what lies ahead for the housing market. And by all indications, things are looking better. And many, including value investor and hedge fund operator Bill Ackman of Pershing Square, who made billions shorting housing related bond insurer MBIA ( MBI) in the last days of the boom, are now calling for its resurrection.

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In a leaked research report titled "How To Make A Fortune," Ackman doesn't just believe the path to wealth through homeownership has been restored. It's on sale.

And as the economy continues to improve and jobs are created, the coming rebound in the housing market will become increasingly clear. Barring some unforeseen calamity, another self perpetuating cycle of higher home prices encouraging increased homeownership and even higher prices is coming. Here's why.

Why it's time to buy

Basically, the bull's case as outlined by Ackman can be boiled down to a few simple bullet points:

Home prices are at their lowest valuation in at least a generation

A large number of forced sellers gives buyers negotiating power

Attractive, low-rate financing

Still favorable long-term supply dynamics as the U.S. has one of the best demographic outlooks in the developed world

Housing is an out-of-consensus idea that is under owned by institutional investors

The most important factor is affordability. With home prices down by nearly one-third from their high, housing affordability as calculated by the National Association of Realtors has moved to the highest levels since the data started back in 1971. Also, with rents on the rise again as vacancy rates fall, the required annual home price appreciation needed to "breakeven" on a comparative analysis of buying vs. renting costs has also fallen to levels not seen since the 1970s.

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Don't fear the 'shadow inventory'

We should mention the supply side of the equation where there is a lot of concern that the "shadow" inventory of unsold, foreclosed and delinquent loan homes will weigh on prices in the years to come.